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Reason Foundation

Medicare Administrative Costs Are Higher Than for Private Insurance

Samuel Staley
August 20, 2009, 3:00pm

Advocates of government run health-care programs, including the public option and single-payer approaches, typically cite Medicare as an example of an efficiently run system. They argue that administrative costs are lower as a percentage of total health care expenditures, implying incorrectly that administrative costs are actually lower. They are not.

Part of the problem is the Medicare patients are older and tend to have more costly chronic health issues. So, total health care spending is much higher than for the typical patient insured by private insurers. Statistically, administrative costs tend to be a smaller overall percentage of spending as a result.

In fact, when measured on a per person basis, Medicare's administrative costs are significantly higher than private insurance, with higher costs ranging from 4 percen to 48 percent according to this analysis by Heritage Foundation health care economist and analyst Robert Book, Ph.D.

"When administrative costs are compared on a per-person basis, the picture changes. In 2005, Medicare's administrative costs were $509 per primary beneficiary, compared to private-sector administrative costs of $453. In the years from 2000 to 2005, Medicare's administrative costs per beneficiary were consistently higher than that for private insurance, ranging from 5 to 48 percent higher, depending on the year (see Table 1). This is despite the fact that private-sector "administrative" costs include state health insurance premium taxes of up to 4 percent (averaging around 2 percent, depending on the state)--an expense from which Medicare is exempt--as well as the cost of non-claim health care expenses, such as disease management and on-call nurse consultation services."

Moreover, these private-sector insurance costs include marketing and profit.


Samuel Staley is Research Fellow


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